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(The views and opinions expressed herein are those of the author, Andy Home, a columnist for Reuters.)
Calm has returned to the London Metal Exchange (LME) copper market after last month’s storm, which forced the exchange to step in to protect those caught with a short position.
The LME cash premium, which rocketed to an unprecedented $1,103.50 per tonne prior to the intervention, was valued at just $15.50 at Tuesday’s close.
[Click here for an interactive chart of copper prices]
The cost of an overnight short position roll, which was $125 per tonne before the LME imposed its lending cap, is currently trading in small contango.
Regulatory action has been complemented by a gradual rebuild in LME on-warrant copper stocks, which fell to a multi-year low of just 14,150 tonnes in the run-up to the October chaos.
The collapsing time-spreads suggest much more is on its way with all eyes now on China, where the country’s copper smelters have openly talked about shipping large amounts of metal to LME warehouses.
The world’s largest buyer turning on the export taps is a rare phenomenon and one that attests to how tight availability is in the rest of the world.
The amount of copper making its way on to LME warrant has so far been underwhelming given the extreme level of the cash premium last month.
Arrivals since the middle of October have totalled 51,125 tonnes, split across LME warehouses in Europe (19,025 tonnes), Asia (18,675) and the United States (13,425 tonnes).
Thanks to a conspicuous absence of cancellations since the LME’s intervention, on-warrant stocks have rebuilt to 62,100 tonnes.
The headline inventory figure has still been falling as all the metal that was canceled going into the October squeeze leaves the warehouse system. But on-warrant stocks are the physical liquidity base underlying LME settlement and the rebuild has played its part in calming market nerves.
That said, the relatively sedate pace of the stocks build doesn’t seem to justify the way the backwardation structure across the forward curve has imploded over the last couple of days.
That, rather, speaks to the expectation that a significant volume of copper is on its way from China.
China is a regular exporter of copper in refined form, although the volumes are dwarfed by what moves in the opposite direction.
Outbound shipments totaled 212,000 tonnes last year, largely reflecting toll-smelting arrangements, which allow refined metal produced from imported concentrates to leave the country without paying any export tax.
There have been rare occasions when China’s smelters have stepped up exports.
Domestic market weakness and a tight LME market in 2016 incentivized 426,000 tonnes of refined metal out of the country, which was and remains a record annual tally.
Perhaps more pertinent to the current situation was another extreme LME squeeze in 2012, which saw the China Smelter Purchase Team export copper to deliver against their short positions. Exports in May of that year were 102,375 tonnes, still an all-time monthly high.
It’s the same group of smelters threatening to deliver large amounts of metal this time around but the problem is securing enough shipping capacity to move significant volumes to the nearest LME warehouses in either Taiwan or South Korea.
The shipping sector is still experiencing its own turmoil with high freight rates and log-jammed ports, including in China.
One of the reasons LME stocks fell so low in the first place is that copper has not been immune to the transportation snarl up – Fastmarkets, for example, reports multi-month back-ups in shipments of the metal from Africa.
The LME time-spread implosion suggests shock-and-awe deliveries over the coming days but it remains to be seen if this is logistically feasible.
Just one week’s delay in global copper shipments is equivalent to around 600,000 tonnes of metal, according to analysts at Citi. (“Metals Weekly”, Oct. 26, 2021)
That may help explain the grab for LME-registered copper in the weeks running up to the October date.
If Chinese exports do accelerate over the coming weeks, they will help plug some of the supply gaps that have opened up elsewhere and, if delivered to the LME, will provide a much-needed reboot.
But the global rebalancing will be no more than stocks relocation and may well leave China itself short of metal if demand surprises on the upside. It’s worth noting that Shanghai Futures Exchange stocks are also currently low at 38,037 tonnes last Friday.
Goldman Sachs, which remains a copper super-bull, argues that global copper inventory is at record lows on a consumption-weighted basis and could fall further, putting the metal on the path to scarcity pricing.
The bank is looking for the price to “balance at $12,000 per tonne into next year” with “the potential for a price spike to even higher levels”. (“Copper: The inventory endgame”, Nov. 14, 2021)
That’s an increasingly minority view among analysts, who are more concerned about signs of a slowing Chinese economy, but the possibility of a stock-out is still keeping would-be short-sellers at bay.
Fund managers have scaled back their long exposure on the CME copper contract since the October price spurt but have shown no inclination to express a bearish view. The outright LME copper price remains finely poised at $9,500 per tonne.
Bears and bulls are waiting to see what happens next to LME stock levels, which means that right now everyone’s looking at China.
(Editing by Kirsten Donovan)
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